The demise of the high-profile ‘Kids Company’ charity and its subsequent liquidation made national news in August 2015 amid allegations of mismanagement and that a £3m government grant had been made in the week before the charity’s closure.
You may be aware of the personal liabilities that controllers of commercial enterprises can face if their actions have contributed to the business’ failure and many of these can apply to charities as well. When we talk of insolvency or financial difficulty we mean a situation where:
- the charity is unable to pay its debts as they fall due (i.e. it is late paying because it does not have the cash flow to meet the debts within their payment terms); or
- that the liabilities of the charity (including contingent and prospective liabilities) exceed the assets of the charity. This is known as the balance sheet test and means that if the charity’s assets were turned into cash, there would not be enough to pay the charity’s creditors in full
Financial difficulty can be encountered by large and small charities and manifest itself in different ways. However, there are some do’s and don’ts to managing a charity in financial difficulty which apply no matter the size.
- get professional help from an insolvency practitioner or specialist solicitor at an early stage to asses whether or not the charity is a going concern and if a rescue or turnaround solution is available. Charity leaders who seek and follow professional advice are less likely to face claims that they have not acted appropriately compared to those who ignore the signs or try to muddle through but make things worse
- keep the Charity Commission informed and updated. The Charity Commission are more likely to be supportive and less likely to intervene if they know that a problem has arisen but is being managed responsibly
- prepare and regularly review up to date financial management information. Be prepared to challenge any assumptions made such as sources or amounts of income
- regularly review planned and proposed expenditure. Is there anything that the charity can do more efficiently or could stop doing altogether? In particular, consider whether the expenditure should be made or does it just reduce the amount to pay creditors?
- keep detailed minutes of meetings to show not only what decisions were taken and why but also what information was considered in reaching those decisions
- panic or immediately resign. It sends the wrong message and could lead to decisions being taken which concern you but in which you have no input
- forget that once the charity is unable to pay its debts as they fall due, or the charity’s liabilities exceed its assets, the primary duty of the charity’s management is to the charity’s creditors and not to its beneficiaries
- forget that there are rules about payment of creditors and consideration needs to be given to whether paying certain creditors ahead of others is justified
If you have a question or query for Andrew Knox, partner in our restructuring and insolvency team, please email firstname.lastname@example.org or call 01392 210700.